Data Says Companies Pay More But Produce Less. Federal Reserve Is Worried

Bryan Dijkhuizen

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Note From The Author

The opinion of the author is his own and has no affiliation with the topic that was included. Sources that are used in this article are the following: Yahoo Finance, Peterson Institute for International Economics and for information about individuals, he used Wikipedia.

Productivity Declines

The rate of decline in non-farm labor productivity in the United States recorded by the Labor Department for the second quarter was 4.6% on an annual basis when adjusted for seasonal factors.

According to the Peterson Institute for International Economics, this was the worst decline from the previous year going all the way back to 1947, and it was also the weakest reading back-to-back after a decrease of 7.7% in the first quarter.

Both of these statistics were worse than expected (PIIE).

"This marks the second consecutive quarter of double-digit gains and suggests businesses continued to pay workers more to produce less," Wells Fargo economists Sarah House and Shannon Seery explained in the report.

Over the course of the past year, labor conditions have forced employers to increase pay in order to compete for a smaller pool of available workers.

As a result, "real" labor costs for employers have risen to levels that are significantly higher than those that are consistent with the Federal Reserve's goal of maintaining inflation at 2% over the course of the long term.

"if labor costs continue to soar amid falling productivity, businesses will be forced to shed labor to protect the bottom line. They may also increasingly seek to invest in labor-saving technology to boost productivity."
"The Fed simply can't get to 2% inflation with this sort of productivity and wage growth," the economists said. "Labor costs tend to be a stickier contributor to inflation, thus the Q2 productivity data position the Fed to continue on its tightening path until it sees wage growth subside and inflation moving meaningfully lower."

In addition to this, they said that there is a possibility that employment may suffer "as companies quickly lose employees that they believe they no longer need in an economy with considerably reduced production."

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